New Delhi: The Reserve Bank of India on Thursday reduced its repo rate – a rate at which it lends to a bank – by 25 basis points to 6 per cent from 6.25 per cent earlier. This is the second subsequent rate cut by the Central Bank under the new RBI Governor Shaktikanta Das and the development is surely good news for banks and its end customers. The recent rate cut will reduce the deals for customers seeking home loans, car loans, etc and also the EMI on some of existing loans might come down. Every time the RBI lowers the repo rate, banks preferably decide to pass on the benefits to its customers and that is why the recent rate cut is likely to benefit customers with a lower EMI on their existing and future loans.

What is a Repo Rate?

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. When the cost of borrowing goes down for banks, they are able to lower their respective marginal cost of funds based lending rate (MCLR), which has a direct impact on loans and other borrowings of end customers.

How Repo Rate cuts affect MCLRs?

Several commercial banks in the country including ICICI, HDFC Bank, Punjab Nation Bank (PNB), YES Bank and others have already reduced their MCLRs in select tenors in a range of 5-15 basis points in February 2019.

How does Repo Rate cut benefits end customers?

Let us assume that a customer has taken Rs 30 lakh home loan for a tenure of 15-years. The current interest rate offered by the State Bank of India is 8.75 per cent which translates into an EMI of about Rs 29,983 for the customers. Now, when the repo rate goes down, the interest rate comes too lowers down to 8.5 per cent, assuming the bank passes on the full benefit of the 25 bps rate cut today, customer’s EMI comes down to Rs 29,542. This might not be a huge difference per EMI wise, but when you total the reduction in your payable interest, it is somewhere close to Rs 80,000.

However, if you are looking for an immediate cheaper loan deal, it might not be possible. RBI, in its statement on Development and Regulatory Policies dated December 6, 2018, proposed that all new floating rate personal or retail loans (housing, auto and others) extended by banks from April 1, 2019, be benchmarked to the external benchmarks, like the Repo Rate. But the regulator deferred this decision during the Monetary Policy Meeting held in the national capital today.

"Taking into account the feedback received during discussions held with stakeholders on issues such as (i) management of interest rate risk by banks from fixed interest rate linked liabilities against floating interest rate linked assets and the related difficulties, and (ii) the lead time required for IT system upgradation, it has been decided to hold further consultations with stakeholders and work out an effective mechanism for transmission of rates," the Central Bank said in its statement.